I decided to publish our MMT Source Book this morning, and overnight, a query came in from Australia that would have made the cut if it had arrived on time. This was it, from a correspondent there:

Your message appears to be reaching far and wide.

What if we used taxes or superannuation to control inflation, not just interest rates? - ABC News

The one point against MMT that is inferred in the above article:

"The central problem is that fiscal expansion is generally more politically popular than contraction, which generates a bias towards expansion."

• This is especially true when an election is looming.
• Politicians can't be trusted to put the national interest above their political interests (snouts in the trough).
• Another argument is that it takes too long to change tax rates because such changes have to be passed by parliament.

Is there a MMT way of controlling political self interest, something constantly on display here in Australia in exchange for political donations and campaign funding.

The Reserve Bank's 'independent' control of interest rates does prevent political self-interest, but as I think you make clear the current 'business' model economics leaves the will of the people in the back seat and taken for a ride to who knows where.

What I do really like about MMT using taxes to control inflation is that tax rates can vary according to income. I believe top tax rates in the late 70's - early 80's in Australia, UK and the USA were all >= 70% and a single wage earner could still buy a family home.

I added the highlight in italics because that is the core question I am being asked, and it really did not take long to deal with this one, as the argument that politicians cannot be trusted with fiscal policy is, in my opinion, one of the strangest claims in modern economics.

We already trust politicians with:

• Creating laws

• Managing budgets of hundreds of billions of pounds or dollars, and maybe more

• Managing;
  • education
  • health
  • setting taxes
  • broader fiscal policy
  • providing a social safety net, and more

• Declaring war

But we are told they cannot be trusted to manage interest rates to supposedly manage demand within the economy to deliver agreed inflation targets, assuming such a thing is possible in most situations, which evidence suggests it is not.

Instead, that power is handed to unelected central bankers whose primary tool is the setting of a single interest rate to penalise borrowers and reward those with wealth.

That is presented as “neutral”, but it is, in fact, a deeply political policy choice.

The theory behind interest rate control in thi wya is profoundly flawed. It assumes always, and forever, that inflation is a purely monetary phenomenon, which it is not.

It assumes that all inflation arises from excess demand due to an overheating domestic economy, which is rarely the case. External supply shocks and the resulting market price manipulation by commodity trading are now the usual explanations for the inflation we have.

And the idea that this must be done independently of government is evidence of the success of the far-right, anti-democratic trope called public choice theory.

The reality of economic management is that it is about exercising judgment in the face of considerable uncertainty. The outsourcing of interest rate management to a central bank instead suggests that it is simply a mechanical exercise of lever-pulling in the face of probability, when it is nothing of the sort.

As a result, what we can see as a result of recent failures is that economic management by supposedly independent central banks has not worked, and yet this myth that doing this is necessary because politicians cannot manage the economic policy of a country in a way that would mean that just one organisation has its foot on both the accelerator and brake, rather than the two we have at present, persists.

In that case, it is right to suggest, as my correspondent did, that taxes can be a much more targeted and equitable way to control inflation than interest rates. Rates punish borrowers indiscriminately. Tax can be directed at excess consumption, speculation, windfall gains or high incomes.

And, as for political self-interest, no system removes it entirely. The question is how accountability is created. Central bank “independence” does not remove politics; it simply relocates political power into institutions that are less democratically accountable.

Meanwhile, it is worth noting that historically, much higher top tax rates have coexisted with rising living standards, strong public services, and greater housing affordability. That alone should make people question many current economic assumptions.

MMT asks us to rethink most of what we think we know about economics. That is why it is important. That is why it is worth having a look at this morning's download. 

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